Startling Twist in Russian Money-Laundering Case

By

Bill Alpert

Oct. 18, 2016 2:38 p.m. ET

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In a startling decision late Monday, a federal appeals court in New York disqualified a famous former prosecutor from representing defendants in a civil money-laundering case that ensued from a gigantic 2007 Russian treasury heist.

The panel of U.S. Second Circuit judges barred attorney John W. Moscow and his firm BakerHostetler from a case where U.S. prosecutors allege that Manhattan properties were bought with loot stolen by corrupt Russian officials who hijacked hedge funds owned by Hermitage Capital and fraudulently claimed the refund of $230 million in Russian taxes Hermitage had paid. America’s pursuit of the Russian treasury scam — also the subject of an ongoing federal grand jury inquiry in the Southern District of New York — has antagonized the Russian government, which has shown surprisingly little interest in recovering its looted funds (see “Crime and Punishment in Putin’s Russia,”Barron’s, April 18, 2011).

The Second Circuit ruling said lawyer Moscow had effectively switched sides by appearing for the defendants in the money-laundering case after having previously advised Hermitage Capital when the victimized hedge fund’s chief Bill Browder was preparing to report the tax theft to U.S. prosecutors in 2008. A Hermitage lawyer Sergei Magnitsky had tried reporting the crime to Russian authorities, but was arrested by the very cops he’d implicated. Magnitsky died in a Russian jail after a beating by prison guards. Barron’s has covered the Magnitsky story for years.

Russian prosecutors quickly pronounced the case closed, after two small-time thugs pled guilty to the intricate scheme. But as Browder successfully campaigned for international sanctions against those responsible for Magnitsky’s death, Russia convicted Browder, in absentia, and Magnitsky, posthumously, of an unrelated tax fraud. Russia’s top prosecutor also issued an open letter threatening to prosecute Browder for the original $230 million treasury theft. To date, the international police agency Interpol has declined to help Russia pursue its charges against Browder, concurring with the hedge fund manager that the case is politically motivated.

In the Manhattan seizure case, BakerHostetler told the federal court that they would rebut the money-laundering charges by also arguing that Hermitage wasn’t a victim of the Russian treasury fraud but the perpetrator. That’s when Browder and federal prosecutors appealed to the Second Circuit to throw John Moscow off the case. In granting that extraordinary remedy on Monday, the appellate panel said it feared that confidences the lawyer had gleaned in his initial representation of the hedge fund might provide grist for Russia’s campaign of retaliation against Browder. “If crime victims fear that the attorneys they hire may turn against them,” wrote Judge Rosemary S. Pooler, “they may be less likely to assist government in its investigations.”

After Moscow’s disqualification, Browder said he felt vindicated. “He was supposed to be our knight in shining armor,” said Browder, “but he could have betrayed our confidences to the bad guys.” The Russian-owned properties that are the subject of the federal seizure case were first uncovered in reporting by Barron’s writer Bill Alpert.

The disqualification by the Second Circuit is a severe rebuke for BakerHostetler and lawyer Moscow, who’d joined the firm after an illustrious career leading white collar crime prosecutions under the famous Manhattan District Attorney Robert Morgenthau. For decades, Moscow’s unit had reached far beyond the confines of New York County in securing money-laundering convictions against defendants like the Bank of Credit and Commerce International, a case involving individuals from 70 countries worldwide, which inspired a Hollywood movie starring Clive Owen. At BakerHostetler, Moscow represented the bankruptcy trustee who recovered billions for the victims of Ponzi scammer Bernie Madoff.

Neither John Moscow nor BakerHostetler would comment when contacted by Barron’s. The lawyer on the appeal was Michael Mukasey, onetime U. S. attorney general under George W. Bush, who told Barron’s that the Second Circuit’s ruling was wrong on the law and the facts. Mukasey said he was disappointed and would help his clients consider their options.

The defendants in the civil money-laundering case are companies controlled by a wealthy and well-connected Russian named Denis Katsyv, who has denied that the money he used for the Manhattan properties was derived from the Russian treasury scam. But after several years of investing in BakerHostetler’s representation, Katsyv will likely have to find new lawyers before the Magnitsky affair can see its first trial in a U.S. court.

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Startling Twist in Russian Money-Laundering Case

In a startling decision late Monday, a federal appeals court in New York disqualified a famous former prosecutor from representing defendants in a civil money-laundering case that ensued from a gigantic 2007 Russian treasury heist.

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